I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Sunday, October 30, 2011

First, let me say that this has been a point of particular focus of Blankfiend, such as this post and several others. I really appreciate his efforts because the RUT does not display the same characteristics as the other indices.

Second, let me say that I am expecting little to no agreement with this post. In fact, I am expecting to get a lot of disagreement / 'what are you smoking' type comments like those that I got with this post.

Third, I think most of the standard macroeconomic analysis that accompanies long term projections is partially if not completely flawed. I think only a tiny minority of analysts actually understand monetary systems. I think only a tiny minority understand that the US and the EMU operate under fundamentally different monetary systems. I think only a tiny minority understand what a sovereign debt crisis really is and the fact the the US has no sovereign debt crisis whatsoever (except for a self-imposed 'debt' ceiling constraint). There are no US Government Bond Market 'Vigilantes'. The US is not on the doorstep of a hyperinflationary depression.

I think I see things a bit differently than most TA and EWP analysts out there.

I view long term trends through the lens of macroeconomic policy decisions. And currently, while the US is cutting back spending, it is not embracing full-blown austerity. This means that current deficits of ~9% of GDP are supporting aggregate demand in the economy, and stocks can still generate reasonable profits and profit growth in this environment. Not stellar, but enough to limp along. Remember, the stock market is not the economy.

But there are major long term risks. NOT US sovereign debt (which is not a bubble, despite those trying to call the top in it). But the size of the financial sector and the continued financialization of the US economy. I think the financial sector, and the instability it promotes, is the biggest impediment to long term growth. And we saw from the 2008 crisis that the financial system was not reformed (even though we had our chance). TBTF was allowed to become TBiggerTF. See section 5 of this post.

My point is that the US can continue to limp along so long as austerity is not embraced (Of course, like I said here and here, if the US significantly embraces austerity, then all bets are off and look out below.). But that the instability that the Financial Sector creates will precipitate another cyclical bear market.

That in a nutshell is my macro stance:

1. We are in a secular bear market, because the cancer (size of the Financial sector) was never removed from the economy2. The instability that the Financial Sector creates will precipitate another cyclical bear market3. The next cyclical bear market will cause enough animosity that there will be political will to finally reform the financial sector4. At the end of the next cyclical bear will be the end of the secular bear market (that started in 2000), and the next secular bull will begin5. As long as the US does not fully embrace austerity, then a Great Depression-type scenario can be avoided. If it does embrace austerity, then all bets are off and look out below (and God help the US economy and population).

My long term thoughts that go along with these macroeconomic conditions are described in a few posts:

I think calling the RUT a major broad market index is misleading. I think the RUT is to the SPX as what JNK is to LQD (roughly speaking, I am *not* suggesting that all RUT stocks are 'junk' stocks). They each measure different things. But I think the SPX is a closer representation of the the expectations of what is happening in corporate America and the US economy than the RUT is. I think the RUT is a measure of smaller and much more speculative issues.

As such the RUTs gains and losses are much more exaggerated. And as the financialization of the economy continues and leveraged money continues to look for gains, it will find its way into riskier assets. And yes, I think the RUT is a much riskier asset class than the SPX. And so I think that this 'overshoot' phenomena to the upside on the cyclical bulls (and much higher than then end of the last secular bull) can be explained by this observation.

With that, here are my thoughts on the monthly chart of RUT:

I am calling the end of the secular bull in the RUT a bit earlier (1998) than then end of the secular bull in the SPX (2000). And what we can see is that the 'middle wave overshoot' phenomena occurs relatively early on in this large corrective period.

I think one of the keys to recognizing this is the fact that the move from 2002-2007 is clearly not an impulse. However you want to subdivide it, it looks and counts like a corrective wave up that goes to clearly new highs. Yet it is not an impulse (and hence cannot be the start of the new secular bull market).

The upshot is that I think the RUT, like the SPX, is in the middle of its secular bear market. And if I am correctly identifying the end of the previous secular bull (500 in 1998) then the next cyclical bear (and likely the end of the secular bear as well, subject to the macro caveats above) will make one more move below this level.

Thursday, October 27, 2011

This is just a mostly trivial update to the original post: Randomly Useful: Fibonacci Ratio Table. Added another calculation variant to derive a few more ratios and to show the coolness of the Fibonacci relationships via the fact that they can be arrived at multiples ways.

And no, just adding 1 or 2 to a ratio is *not* a valid technique to derive ratios (and yes, I am speaking to all the knuckleheads who still use 1.382 as a Fibonacci ratio)

------------------------------------

Nothing Earth-shattering, but here is a nice little table of Fibonacci Ratios. I actually generated this table a long time ago (6 months?, 9 months? edit 10/27/11: Okay, lets just say a few years ago :) ). Anyways, I would sometimes come across lists of Fib ratios. But as a guy who wants to understand where things come from in the first place, that was very unsatisfying.

The are many ways to come up with Fibonacci ratios besides looking at adjacent Fib numbers. There is the exact equation, which gives you the main one (0.618 and 1.618). But the most clever way is as a system of linear equations (and since I love linear algebra, this is very cool). I was planning on writing a really detailed post of why I love phi and going on a geek trip using linear equations, like I did regarding e as with this post: Why e is the coolest number. But I decided to restrain myself this time :)

:) This is is just one of the days/weeks that you have to look at with bemused detachment. First off, if you were long going into this morning, congrats! Like I said yesterday, my trend system triggered a cover signal, and almost triggered a buy signal. Unfortunately this one isn't horeshoes. No cigar here.

I guess why it is really annoying is because I am definitely on the bullish side of things with my outlook and have been for the last several months. But I don't trade my outlook, I trade my system. And there has been enough chop and loss of momentum to keep my long signals from triggering before the move happens (as opposed to the beginning of October when it captured nearly the entire move from Oct 4 to Oct 12). So the only thing I can do is laugh and shrug. I am not chasing it here, I will wait for the next pullback, even if it is just sideways consolidation. This is when it pays to be patient and to wait for the next setup. That's what I am doing at least. October has been very good for my trading account so far, I am not going to blow it at the end of the month by getting emotional about it.

One saving grace is that my Daily Trend System has been on a long signal since 10/10 at 1181 (see here). So while the chop the last week has been putting the hurt on my 60-minute system (and by 'hurt' I mean that it is getting shaken out before the real trend emerges. It is still up 0.6% for the last 3 trades and 10.6% for the last 4), the Daily System keeps rising. In fact the Daily Cycle signal is looking downright bullish.

A word on 'overbought'

I have been seeing a lot of posts talking about how overbought things are: 'the NYMO is crazy overbought!', 'the RSI is at hugely overbought levels!', etc. That may be, but I wouldn't take a short position based solely on 'overbought'. Markets can stay overbought far longer than they stay oversold. I even use the term overbought sometimes. But the point is that I never short based on that. I wait for my system to give a sell signal first (which has to have a little downward momentum behind it).

Wednesday, October 26, 2011

Whew! Now that is a crazy day. I am sure if you are a day trader (which I am not) then you are having a blast. But this is too much chop for my poor trend system :(

We had a crazy gap open (which did not trigger a cover based on the momentum down from yesterday) which sold off, but then the day bottomed and turned around and eventually came back up, and that is when the cover signal occurred (at the same level as the short signal yesterday = flat trade). No buy signal yet, but a strong day early tomorrow likely will. Chop, chop, chop ...

Tuesday, October 25, 2011

The trend up yesterday turned out to be very transitory indeed. It could have been sustained with a sideways day today, but not with a gap down and then the selloff in the first 5 minutes the size of which we had.

So my 60-min Trend System issued a sell signal right after the open today. See here and here (which leaves a fairly small profit on the position opened Friday), and then after the day wore on a short signal was given. See here and here. (These updates are sent out as part of my Trend System Notifications).

No idea if this is just a correction or the start of something bigger, so we will just see where this goes.

Monday, October 24, 2011

Today is confirming the breakout up. This is good to see. Now is where things get interesting. We have the resistance zone at 1255-1260 and we also have the 200 DMA at ~1275.

Currently the breakout is not as dynamic as the rally from Oct 4 - Oct 12 (which was pretty spectacular by historical standards in terms of slope and size), which is not surprising. My trend indicators are all saying (so far at least) to expect a more subdued rally. So I bet we move slowly into that resistance zone over the next couple of days.

And I wouldn't be surprised by a pause there (and maybe even a sell signal). Just because we get a sell, doesn't mean it is time to crash. It could end up being simply a mid-rally correction (like Oct 14-19). I will be listening to my trend system and if it says to sell and go short, I will do exactly that. I honestly have no expectation about the next trade. (And no matter what I think about the state of this cyclical bull market, I will not let that bias my observations about what is happening on the trading timeframe).

It also pays to make the observation that everybody who is *expecting* 'Minor 3 down' (despite my demonstrations as to why that count is invalid) doesn't get too biased themselves. This market is overbought on the 60-minute timeframe again. But is not even remotely overbought on a daily or weekly timeframe. And after a correction, it still has a lot of room to run up, if it so wants to.

But was today a breakout or a bull trap? The evidence right now is mixed at best. The SPX broke out to a new high, came down retested previous resistance (now support?) but failed to go back to the high. That doesn't seem particularly strong. But the day is what the day is and I still have a buy signal in place. So I guess we will see what happens over the weekend.

Thursday, October 20, 2011

So my ideal setup that I discussed yesterday manifested on the Nasdaq ... but not on the SPX. However, it is looking to me like the move on the SPX could be a triangle. If these theories are correct, then tomorrow should be a breakout day. Should be interesting. Either a breakout or a breakdown here will be telling for what will happen for the next few weeks.

There has been some talk recently comparing this pullback and the pullback in 1998. Some good posts on this have been by Doc Barter and Fearless and Volar. And I am also going to throw in an interesting observation made by HighRev that feeds into the comparison below. I decided to take a look and I was also struck by a large number of similarities.

1998present

So we are at a very interesting confirmation point right now. A break up of the small range at the top of the large range will be a very strong support of the comparison thesis.

Now I am sure that I will get a bunch of comments talking about my 'bias'/'loss of objectivity' like I had in this post: Revisiting the Large Count. But if you read this post in its entirety, you will understand where I am coming from.

I have pointed out a number of evidences in the past several months as to why the May top is likely not 'the' top. Yet am I not being permabullish. I am simply in no hurry to call the end of this cyclical bull market complete. And with all of the bearishness out there, my contrarian spidey-sense makes it seem like this whole mini-panic in Aug/Oct is a correction to be bought in the bigger scheme of things.

Wednesday, October 19, 2011

Yesterday did turn out to be a bunch of gamesmanship after all. And my nascent buy signal (as I discussed yesterday) that I didn't trust turned out to be correctly untrustworthy. And then today I got a sell signal again .... :)

So I am not trusting anything in this range of OPEX induced volatility and will wait for a breakout and/or compelling setup. This is one that I would particularly like if it were to happen:

Tuesday, October 18, 2011

Wow, this is just insane. I was expecting some volatility and fireworks but this is ridiculous.

First, 60-min cover signal was issued. Small loss from yesterday's signal. But right now it has just flashed a buy. .... But I really think the setup stinks. Way overbought, and coming off the heels of a pretty solid sell signal. Today feels very 'reactionary' (a bunch of OPEX gamesmanship). So I would like to see some more follow through tomorrow if I am going to take this move seriously.

But we did have a move down and strong bounce off of the 23.6% retrace (like I was highlighting yesterday). It just seems to me like the pullback has not taken enough time yet. We'll see.

Monday, October 17, 2011

How far will it go down? I have no idea. But here are a few points to consider: This is OPEX week, so expect some craziness (volatility early in the week, with nothing straight up or down). Also there are several key companies reporting this week (see: here, h/t Tasty), which should add to the 'fun'.

Now I say a quasi sell signal because my main indicator has not officially triggered one. It is slowing down but it isn't there yet. However:

- 3 secondary indicators have issued sells (these are normally confirming indicators)- The move has gone back to the top of the range (resistance for the last 2+ months)- The move is overbought on several <=60 min timeframes- My system made 10% off this move in about half as many days.

Currently my 60-min Trend System *still* hasn't issued a sell signal. But it has almost finished rolling over. And with any decent pullback on Monday (which looks likely) then it likely will.

Today looks and feels like an exhaustion move up and we will finally get some kind of pullback. I was glad to stay out of the market the last couple of days. I had a small short position that was triggered by my 15-min system but it got caught in the cross-fire of the gap up this morning (just par for the course for the volatility at the end of a spike move).

Thursday, October 13, 2011

Last week (during another episode of Crazy Uncle binve's Unpopular Opinion and EW Count Time) I was showing this count. So far things are going pretty close to script. Move up the the top of the range. Pullback/pause. Then after that we will see how the next act moves.

But I have been thinking .....

Here are a few consensus views that seem to be going around in the EW and macro spheres:

1) The vast majority of EW blogs seem to be counting this as a Minor 1 down that ended on Oct 4 and we are in a Minor 2 up (with the dreaded Minor 3 down to come). There seems to be a sense of inevitability / preemptive vindication about this stance.

2) The macro commentators are just flabbergasted that the Eurozone is not immediately imploding. "Dexia getting bailed out and nationalized", "Slovakia not agreeing to debt terms", "Italy is teetering on the brink of default", etc. etc. So there seems to be a widespread belief that this is just a relief rally because things moved down too far too fast in August. And we will be seeing these economic problems manifest in the stock markets (Eurozone and then a contagion to the US) in the next couple of weeks/months.

3) Recession warnings are popping up all over the place. ECRI (who has never flubbed a recession call, granted in only a 15 year time span) is saying that a new recession is inevitable. It seems like the majority of economists are either outright pessimistic or have curtailed optimism greatly.

Hell, even my recent counts are showing us that we completed a W down, we are in an X up, and so we will be making a lower low in a Y wave early next year.

The view seems overwhelmingly biased that we will be making a lower low across the analyst spectrum. In preparation for this 'inevitable crash' short selling reached a significant peak recently.

Of course there are contrary bullish voices out there, but from my (hopefully objective) assessment, they seem to be in the minority.

I have made the case many times that this cyclical bull market is likely not over:

However my original thought was that this mid-bull interlude would last longer. But with all the bearishness out there, now I am not so sure.

So I am revisiting an idea that ZimZeb and I were hashing out at the end of August. It has to do with some time relationships, and it comes from this comment thread. Here is the relevant excerpt that I will be discussing:

I also was doing some (likely erroneous) time analysis and comparisons, it goes something like this:

Call March 2009-May 2011 Primary W. = 2.15 years

Primary W is made up of Int W, X, and Y. The time ratio of Int X (0.22 years) to Int W (1.12 years) is 0.196.

Apply to Primary W => 0.196*2.15 years = 0.42 years (~5 months)

If Primary W started in May 2011, then if it obeys a similar time ratio, then it would end in Oct 2011.

This is what I wrote in August, and didn't think too seriously about it.... But now I am. Because in that same comment thread, you can see that one of the criteria that I was looking for (and didn't happen in August) was PPO divergence at the bottom. But with the October low (which could arguably be a capitulation bottom) we do have one.

So that means I am starting to think more seriously about this count:

The bottom of the Jul 2010 wave and the Oct 2011 wave display PPO divergence (blue indicator at top) [for an explanation of the PPO vs. MACD, see here]. I don't use the standard 12,26,9 settings (because it is too fast to be useful) and I like to slow it down to 14,30,10 which responds a little more slowly and less erratically.

This is certainly far from 'proof' of a bottom (which I guess the 'proof' would be a higher high above 1370, which is not particularly useful from a trading perspective) but says at the very least:

1) A tradeable bottom is in and any pullback should be bought for a couple more weeks of upside2) The *potential* of a more significant bottom ('the' pullback low before continuation of the cyclical bull) is in.

Like I have said before, I don't let my expectations get in the way of my trading: Regarding Trading Positions and Long Term / Macro Outlook. But the point of this post is to illustrate why I think for the intermediate term (weeks/months) and potentially for the longer term (several months/couple of years) the risk is to the upside, not the downside.

Of course, like I said here and here, if the US significantly embraces austerity, then all bets are off and look out below.

So *IF* my theory about a significant bottom is an accurate prediction, then the longer term landscape could look something like this:

Now I say a quasi sell signal because my main indicator has not officially triggered one. It is slowing down but it isn't there yet. However:

- 3 secondary indicators have issued sells (these are normally confirming indicators)- The move has gone back to the top of the range (resistance for the last 2+ months)- The move is overbought on several <=60 min timeframes- My system made 10% off this move in about half as many days.

So I am calling it good :)

I will just wait to see how this overbought condition resolves itself and wait for the next 60-min signal to materialize.

However, like I said on Monday, my Daily System issued a buy signal. So that means whatever happens in the next couple of days, I think there is more upside to come in the following weeks. I still think the risk on the intermediate term is to the upside, not the downside.

Tuesday, October 11, 2011

I would like to say a large Thank You to Blankfiend, for all the work you have done over the past couple of years.

You have a unique view of the markets. And like me, you have very much challenged the EW orthodoxy (most of the counts around the blogosphere). It can be very discouraging to get little to no reception when you discuss the market from a non-mainstream view. I have felt the same way many times when some of my 'big idea' posts get very little reception. So I can understand where you are coming from.

And I fully admit that I am guilty of the same thing that I discuss above. I spend my time in analysis and research and I put together my posts and I tend not to comment on other people's sites very much anymore. So I apologize for not giving you as much feedback as you deserved.

But I wish you nothing but luck and good trades. And I am appreciative of the work you have given to us.

Monday, October 10, 2011

My Trend System issued an early buy signal yesterday at 110.11 (see here and here). It was strong enough for me to send out an early signal notification. That signal was confirmed today with my main indicator on my 60-minute system at 112.50.

Excellent post by Mark at Fund My Mutual Fund regarding the recent spike in short selling in September.

This goes along with the theme of my recent posts, that we have not seen the 'top' of this cyclical bull market yet and that if we crash here, it will be the most widely telegraphed crash ever because nearly everyone is prepared for it:

It almost never fails does it? Just as investors position themselves for zig.... instead zag happens. Apparently we just saw the largest increase of short selling since 2006 in September - which worked out nicely for about 1.75 days in October, before this face ripping rally of 10%. One can be sure part of this move upward is those newly placed shorts covering - indeed we saw such a vicious move last Tuesday in the closing 45 minutes, I have to assume many of those positions were harpooned that day.

* Investors are increasing bearish trades around the world by the most in at least five years, convinced the lowest valuations since 2009 will prove no barrier to losses after $11 trillion was erased from equities. Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock last month from 9.5 percent in July, the biggest increase since at least 2006.. * Trades that profit when Chinese equities decline have reached a four-year high and bearish bets in the U.S. are the most since 2009, exchange data show. * Slowing economies are spurring short sellers after indexes in 37 out of 45 major countries tumbled 20 percent, the common definition of a bear market. * “The Lehman collapse is way too clear in people’s minds,” said Henrik Drusebjerg, who helps oversee $230 billion as senior strategist at Nordea Bank AB in Copenhagen. “They don’t want to get burned as much again. They know either they get some protection or get out altogether.” * About 4.1 percent of NYSE shares have been borrowed and sold, up from 3.5 percent at the end of July, data from the bourse shows. U.S. short sales are rising at the second-fastest pace on record after the 2008 financial crisis, according to exchange data dating back to 1995. * Short selling, where traders borrow shares and sell them, hoping for a decline, is increasing even as equities approach the cheapest valuations on record. The MSCI All-Country World trades at 11.8 times reported profit, compared with 11.9 in the five months after Lehman’s collapse. The measure’s average price-earnings ratio since 1995 is 21, data tracked by Bloomberg show. * The bond market indicator that has predicted every U.S. recession since 1970 now shows that the economy has a 60 percent chance of contracting within 12 months. The so-called Treasury yield curve, adjusted for distortions caused by the Fed’s record low zero to 0.25 percent target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points, or 0.20 percentage point, less than five-year notes, according to Bank of America Corp. research.

And the last time this happened?

* Bearish bets last increased faster in March 2009, the same month the S&P 500 began a bull market that doubled its value.

Friday, October 7, 2011

All told, it was a pretty bullish week. The close today seems to be suggesting weakness on Monday (a pullback to burn off some of the short term overbought conditions). But my 60-min Trend System does not seem to be indicating that this wave up is over.

SPX has already broken above its downtrend line and has retested it. The NASDAQ is currently testing its downtrend line.

Thursday, October 6, 2011

Wednesday, October 5, 2011

I still maintain that we saw an important low yesterday (as Fearless said, it is likely the low for the rest of 2011 and I definitely tend to think that as well).

My Trend System issued an early buy signal yesterday at 110.11 (see here and here). It was strong enough for me to send out an early signal notification. That signal was confirmed today with my main indicator on my 60-minute system at 112.50.

So this could be a significant bottom. Or it could just be a strong rally that lasts several days. Either way, my trend system is pointing to more upside from here, based on the strength of the trend signal.

Tuesday, October 4, 2011

- Today marked an important low- Earnings expectations have been hammered the last two months and it won't take much in the 3rd Quarter earnings season (right around the corner) to spark a decent rally- Bearishness across the board is way overdone, and everyone 'knew' the crash was coming. Watched pot and all that jazz

Unpopular counts:

I still think this is just a big fat corrective mess, not some half-baked impulse down (and the fact that non-EW types are now putting up charts with 12345 down all over the place should be a warning sign).

Monday, October 3, 2011

Not much to say. We now have a lower low than Aug 9. We also have massive divergence with the low. So the question is: is this a bottom with divergence? Or the start of a waterfall down? I don't know and so I am just being patient waiting for a tradeable setup.

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